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03/31/2013

Business, Competition, and Corruption-Becker

The traditional case for competition and private enterprise does
not assume that it produces perfect outcomes. Rather, the case is that the
outcomes from competition are generally good, and certainly much better than those
in a government- dominated economy, or in any other alternative ever devised.
This is worth bearing in mind as we consider the topic for this week: business
and corruption.

Posner gives many examples of unethical and illegal behavior
by businessmen in recent years. These and other examples are certainly not
great advertising for private enterprise, but as he indicates, this is not
proof that such behavior has increased over time. Much more important, it is
not proof that unethical behavior is more common in business than in say government
or universities. After all, to take just one example, four former governors of
our own state of Illinois were sent to prison, and one is currently doing
extensive time in prison. for widespread corrupt practices.

Posner also argues that inefficiencies and unethical
behavior in business are magnified by competition, at least by the intense
competition among business in the United States. I very much disagree with this
claim since there is no convincing evidence or theory indicating that
corruption and inefficiencies are greater when businesses compete intensely.
Competition helps discipline business behavior by giving consumers alternatives
when they believe they are harmed by unethical business behavior. For their
part, companies usually try to get repeat business and keep the loyalty of
their customers by offering dependable goods and service. Monopolies need not worry
much about consumer loyalty since their customers have limited alternatives.

To be sure, I would not claim that competition always works
in this way, or that private and public monopolies are always inefficient.
Sometimes, as Posner indicates, consumers are fooled by the “small print” in
contracts they sign, or they choose products that are more harmful than they
anticipated. Sometimes too, businesses engage in unethical practices because
their competitors are profiting from these practices. But many examples
illustrate that, overall, competition surely helps consumers.

The postal system was a lethargic, rigid, surly organization
dominated by its unionized workers while it had a (government-enforced)
monopoly of regular mail delivery. Competition from FedEx, UPS, and the
Internet has greatly improved delivery of information and goods, and has even
made the postal system a little more efficient and a little nicer. Microsoft used its monopoly
power to extract surplus from consumers of Office and the Internet that it
dominated until faced with extensive competition from Google, Apps, Facebook, and
other ways to communicate and use the Internet. No one who has dealt with local
government-created private monopolies like Comcast will extol the virtues of
not having competitors to turn to for better services.

To take an international example, perhaps 40% or more of China’s
manufacturing employment is in state-run enterprises often with real monopoly
power. Private companies that usually face considerable domestic and
international competition dominate the rest of manufacturing, agriculture, and
most services. There is very widespread agreement that the private sector, not
public enterprises, has produced the dynamism that has driven the Chinese
economy forward. And when commentators speak about corruption in China they are
usually referring to local and central governments, and the regulators
appointed by these governments.

Nothing in my discussion, however, should be taken to imply
that competitive private sectors are always self-regulating. Economists were
already arguing in the middle of the 19th century that the financial
sector needed regulation and a government lender of last resort. Consumers
would have difficulty determining the safety of new drugs without regulations that
forced extensive clinical trials (but the FDA also has regulations that are highly
counterproductive). I can give other examples where regulations are beneficial,
but my main claim is that competition usually helps consumers whether in software,
groceries, or education. Competitive private enterprises, not governments or
regulators, have led the way in helping countries progress and reduce the
incidence of terrible poverty.

Comments

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Competition as a regulatory governor in Economics, Business and Finance? Yes, it may work over time, but in the process leaves behind a field of desolation. Extremely wasteful in terms of resources; both material, financial and human. Which we have seen time and time again. Hence, the desire and need for Regulation - even if it can become stultifying. But then, that can be remedied and as such is not as wasteful or destructive.

1. With due respect, I think that an overall/overarching economists' view of corruption is not very useful. A broad overview from empirical economics may. however, be of some (limited) theoretical value

2. Sectoral analysis seems to be far more useful (and within sectoral analysis, analysis of job types). For instance, there is said to be more 'corruption' among used car salesman in the car dealership industry as opposed to among doctors in the healthcare industry in America. (One may quibble a bit about what is moral and what is not but even for somebody like me who was not born in America, the same conclusions that other people have come to regarding the level of 'corruption' is in accordance with what I have seen.)

3. Transparency is one of the chief factors in controlling corruption. In general, the greater the transparency in a particular industrial sector, the lower the level of corruption. e.g. there is much transparency in software startups and there is low levels of corruption there -- there is no place for the corrupt to hide.

4.
> Much more important, it is not proof that unethical behavior is more common in business
> than in say government or universities.
With due respect, there is usually much more unethical behavior in business as compared to universities. Professors are sometimes extremely nasty. Some of them play sick mindgames (L.O.F). Still others misrepresent the value of their research. Worse than that, and trust me, this is not a leap of faith, some even lie about research results. Still, due to high levels of transparency in academia, such practices are usually exposed before long.

The first order bit, as it were, is that corruption is primarily a governance issue. Not all the analysis of economists seems to have done much for corruption in countries such as Mexico over the past several decades. Once governance mechanisms are corrupted, it doesn't seem like it has ever been very easy to get things back to Normal. The Normal state of affairs of Humankind, it appears, has always been to be poor and starving, not wealthy and well-supplied. It takes an extraordinary Impetus to get out of this state of affairs.